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Newsmakers: Europe Considers Emergency Aid Fund

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Growing concern over the indebtedness and burgeoning fiscal deficits of some European countries has led Germany’s finance minister, Wolfgang Schäuble, to propose the establishment of a European Monetary Fund, or EMF.

The model would be the IMF but dedicated to bailing out European countries facing external financing difficulties. Schäuble’s proposal reflects concern that the “one-size-fits-all” monetary policy underlying the euro will generate additional financing crises and that the EU—as a developed market economy—should be able to look after its own and not have to rely on the IMF like less developed economies.

Reaction was mixed. Policymakers in Greece, which has been at the fulcrum of the current crisis, were broadly in approval. Those in France were ambivalent, with finance minister Christine Lagarde indicating that the priority should be tackling the Greek crisis. However, other key policymakers seemed strongly opposed. Jürgen Stark, one of the ECB’s most influential board members, said an EMF would be incompatible with the principles of monetary union, while Bundesbank head Axel Weber said the eurozone’s existing mechanisms—for preventing financing crises and disciplining countries that flouted fiscal rules—should be sufficient.

Schäuble provided scant detail for how the EMF would operate, not least about whether its operations would be confined to the 16 members of the eurozone or all 27 members of the EU, and how exactly such a vast undertaking would be financed. Another concern is the extent to which the EMF would be able to enforce eurozone rules governing fiscal policy and debt. Schäuble says the introduction of an EMF should be accompanied by much tougher sanctions against countries breaking eurozone rules; again, however, there are practical concerns about exactly what sanctions and how they would be enforced.

Yet another concern is constitutional: Setting up an EMF might require a rewriting of the Lisbon Treaty, which would then have to be passed by all 27 EU countries, some by referenda. Recent experience suggests this could be tortuously slow, not least because many countries will be strongly resistant to any move toward a common fiscal policy, which some say is the only way imbalances can be prevented over the long term. In recent comments Lagarde indicated it could take five years for an EMF to become reality. Others echo the concern.

Jon Levy, a senior analyst with the Eurasia Research Group in Washington, DC, says a model exists for the EMF: the balance of payments facility available to non-euro members whereby the European Commission lends money financed through its own debt issuance, guaranteed by the EU budget. However, the need for the EU budget to balance would mean very real constraints on the size of such loans. This suggests the EMF may have to be established from scratch.

“In principle, an EMF might create a short-term bump to eurozone institutional credibility. However, it is difficult to imagine an EMF providing the same sort of incentive and pay-off as EMU,” Levy argues.